Trepidation and Restrictions Leave Crowdfunding Rules Weak

Picture Courtesy of Crowdsourcing

Picture Courtesy of Crowdsourcing


Crowdfunding is becoming a reality, but the question is whether it will thrive or become largely a vehicle for fraud.

If it does turn out to be a disaster, don’t blame theSecurities and Exchange Commission. The agency was merely following orders when it was told to adopt rules for crowdfunding.

Last week, the regulator proposed rules governing crowdfunding in a 568-page release. The idea behind the proposal — mandated by the 2012 Jump-start Our Business Start-ups Act, or JOBS Act — is born of our penchant for the kinds of popular ideas that emerge at TED talks. In the case of crowdfunding, the concept is that small companies can obtain the financing they need through the “wisdom of crowds.” The crowd in this instance will use the Internet to collectively pick the best investment. It is a win for all involved, particularly small companies that are starved for financing.

There are reasons to be skeptical, however.

For one, the experts in investing in start-ups — venture capitalists — are not terribly successful. According to the National Venture Capital Association, 40 percent of venture capital investments fail, 40 percent break about even and only 20 percent have a decent to high return.

Crowdfunding investors, that is, you or me, are likely to lack the diversification of venture capitalists, meaning that crowdfunding investors will not have the successes to even out the overwhelming majority of failures. Moreover, the crowd’s ability to pick winners may not be as good as the venture capitalists, meaning an even higher rate of failure.

Then there is the second problem associated with crowdfunding: fraud. Without proper identification, anyone can put a nifty sounding idea out there: Elaine from “Seinfeld” was right; we need to bring back the sponge! Or how about brushless toothbrushes! In the worst situation, the entrepreneur could take the money and run. Even without outright fraud, once the money comes in, there is no oversight. So entrepreneurs can fritter it away on their own expenses.

Take a recent campaign on Kickstarter, the crowdfunding site where companies raise money in exchange for products or services instead of shares. Some people compare the crowdfunding process of raising capital to what goes on at Kickstarter.In this case, an entrepreneur raised more than $122,000 on Kickstarter, preselling versions of a board game, the Doom that Came to Atlantic City, termed “a Lovecraftian game of urban destruction.” Months later, the entrepreneur canceled the project, having spent the money on things like moving to Portland, Ore. Atlantic City survived, and the only thing destroyed was the crowd’s money.

With crowdfunding, even if a company were successful, there is probably no way to exit or even control the company. As the S.E.C. acknowledged in its release last week, these companies are extremely unlikely to go public.

It all means that you will have better odds at the casino than investing in crowdfunded companies.

When Congress was considering the JOBS Act, the legislation that made crowdfunding possible, the S.E.C. was strongly opposedMary L. Schapiro, then the chairwoman of the agency, said that the law would “weaken important protection” for investors.

Congress largely ignored those concerns and dumped the rule-making for crowdfunding in the lap of the S.E.C. So the regulator has swallowed hard and tried to make the best of this situation.

The S.E.C. did not respond to requests for comment.

The final rules are a reflection of Congress and another force — Eugene Scalia.

Source and more on



MarketWatchWhy a crowdfunding site is giving out $10000 scholarshipsMarketWatchCrowdfunding site GoFundMe announced Thursday that it will award $10,000 to 10 students with pages on their site that fundraise for education. The award is part of a contest the site held throughout Septemb [...]

BloombergCouples Desperate For Children Turn to Crowdfunding FertilityBloombergCrowdfunding has become a popular mechanism for many couples who can't afford the high costs of IVF, or adoption and surrogacy. “It's not an easy thing to share publicly,” says Crystal Barrett, 33 [...]

Crowdfund InsiderBrief: GoFundMe Presents $100000 in College Scholarships to 10 StudentsCrowdfund InsiderTo qualify for the scholarships, each student had to create a crowdfunding campaign on GoFundMe, shared stories about the obstacles they had overcome in pursuing their education, h [...]

Huffington PostReal Estate Crowdfunding's Pathway of ChangeHuffington Post“Crowdfunding is just the Internet,” stated Attorney Mark Roderick as he opened last month's RealCap Chicago. RealCap is an annual conference that joins crowdfunding leaders and innovators to propel th [...]

Smart From The Start: 3 Ways To Properly Establish Your Business When CrowdfundingCBS LocalConsequently, burgeoning entrepreneurs have turned to crowdfunding platforms to get the seed money they need to get business ideas off the ground. However, seeing as 98 percent of crowdfunding p [...]

Crowdfund InsiderTitle III Crowdfunding Might Not Be What Many ExpectedCrowdfund InsiderI have been immersed in the equity crowdfunding industry since late 2015 and have tried to collect as many different perspectives on the industry from as many experts as possible. And while it is h [...]

The RegisterHardware ain't hard, money is: Crowdfunding, bootstraps and startupsThe RegisterHmm, I think we call this bootstrapping in IT, or in our case crowdfunding. Raise enough money to get the first shippable product and ship it. (I did once work on a "big" defence [...]

Crowdfund InsiderSEC Schedules Open Meeting on Rules 147 & 504 Impacting Intrastate CrowdfundingCrowdfund InsiderMary Jo White October 30 2015 The SEC has scheduled a meeting to consider proposed amendments related to Rules 147 and 504 – securities regulations that impact intrasta [...]

ExtremeTechNew crowdfunding project promises an ATX motherboard for IBM's Power8ExtremeTechWe don't cover many crowdfunding projects at ExtremeTech, because most of the pitches we get are frankly terrible. While we can't make any promises about any crowdfunding project [...]

CoinTelegraphCrowdfunding vs. ICO: Experts Question Legitimacy and Guarantees of Initial Coin OfferingsCoinTelegraphOne major difference exists between traditional crowdfunding methods and ICO, and that is market value. When a product is introduced on crowdfunding platforms like Indie [...]

CFB Finance

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |